Sam Bowman: For long-term growth, Britain should make its tax code more attractive to highly-skilled workers

Though debate rages over the quantity of immigration into Britain, less attention has been paid to the quality of migrants. A new report released by the Adam Smith Institute today, Taxing Talent: How Britain Can Attract and Retain the World’s Best Workers (pdf), assesses the challenges facing the UK’s migration policy over the coming years and argues that lower income taxes are critical to improving Britain’s appeal to highly-skilled migrants.

Positive net migration is a necessity, both in the short-term and the long-term. In the short term, the economy is dependent on a flexible labour force if a strong recovery is to be possible. In the long-term, positive net migration is even more important. Britain’s ageing population and pensions system that depends on current tax revenues instead of personal savings means that, in order to maintain pensions at trend levels, a net level of at least 270,000 immigrants will be needed every year until 2050.

The migration debate is not just about immigration, but emigration too. In absolute terms, the UK has the fourth-highest number of highly-skilled immigrants in the OECD but also the highest number of highly-skilled emigrants. As figure 1 below shows, this is unique among large OECD countries. When it comes to highly-skilled workers, Britain has an overall migration level closer to tiny Belgium’s than comparably-sized countries like Spain, France, Germany, Australia or Canada.

[Figure 1]

The government should be acutely aware of the importance of its migration policy. The immigration cap could have a profoundly negative impact on the economy: if the government intends to push forward with it, it will have to make significant changes elsewhere.

Given the importance of migration to the British economy, proactive policies to attract and retain highly skilled migrants should be on top of the government’s agenda. Our report draws on established academic research into migration patterns to assess the five biggest influences on a highly-skilled migrant’s decision about where to move.

These influencing factors are: Net wages, employment prospects, professional development prospects, social and professional networks, and social and political conditions at the destination. Of these five factors, the government can influence only one in the short-term: post-tax wages. In other words, income taxes are a key factor in a highly skilled migrants’ decision about where to move.

That the tax burden is so important should be no surprise. An Adam Smith Institute report from earlier this year, The Revenue and Growth Effects of Britain’s High Personal Taxes (pdf), showed that the 50p tax rate is driving highly skilled workers out of Britain. Today’s report simply shows the other side of the story: Britain’s high taxes aren’t just pushing Britons out, but putting off the most talented workers from moving here too. Small wonder that a firm like Twitter chose comparatively-low tax Dublin for its international HQ over London last month.

The government should recognise the need for more highly-skilled migrants, and try to make Britain more attractive both to potential immigrants and Britons thinking about emigrating. What can it do? Short-term tax breaks for highly skilled immigrants have been tried, most notably with Denmark’s temporary tax break for scientists. This was largely a failure – it attracted few highly-skilled workers, and of those it did attract, few stayed.

The only factor the government can influence in the short-term is income tax rates. Scrapping the 50p tax rate is an important policy goal, but perhaps even more important are the 20p and 40p rates, which apply to all highly-skilled migrants.

Furthermore, the overall need for migrants should be balanced against valid concerns that open borders could lead to public service abuse. This could be remedied by an “open borders, closed public accounts” system whereby immigrants would be required to sign up to private insurers for healthcare and other large state welfare expenditures. This could be an economy-friendly alternative to the immigration cap. It would allow greater migration while addressing the biggest concerns behind the policy.

Cutting taxes is important for a whole range of reasons. Ensuring that Britain attracts the world’s most talented workers is a critically important one. The economy is stagnant, but Britain has a huge amount of untapped potential, and it is one of the most desirable places in the world for highly-skilled workers to live. If we want to revitalise the economy, a big step would be to stop taxing talent and harness the potential of the world’s best workers.